Nykaa - Beauty-ful ecommerce play

Updated: Feb 15

Company Name – FSN E-Commerce Ventures Ltd (Nykaa)

Current Share Price – INR 2,191 (December 6, 2021)

Market Cap – INR 103,628 cr


1. What is interesting about the stock?

Makeup is not a mask that covers up your beauty; it’s a weapon that helps you express who you are from the inside”. — Michelle Phan

How much time does your wife or female partner take to get ready? Always, beating the expectations!

Looking good is a basic need of any human being – it is a bit more pronounced in the fairer sex for lot of cultural or psychological reasons. Beauty, personal care and fashion products are an age old industry which would also be evergreen. We may shift from offline to online or from chemical based to natural/vegan etc but the need would always be there.

Fashion is easy to understand. But, what is covered in beauty and personal care products – it is face, body, eye, lip and nail products.

Based on my personal experience, the amount of beauty, personal care and fashion products purchased (per capita) in India is significantly less than the Middle East or South East Asia. Even Europe and US are ahead of India. Current size of the beauty & personal care (BPC) market in India is estimated to be around USD 20 billion in 2020. Expected growth rate could be around 14-15% for next few years driven by under-usage (vs global standards) and increase in disposable income. Online penetration in the BPC industry is around 8% (source – Company RHP). China, US and Korea have online penetration of 35%, 20% and 45% respectively. Lot of room for online BPC industry growth.

Enter Nykaa!!

Nykaa is a consumer technology platform selling beauty, personal care and fashion products. Company was launched in 2012 to focus on BPC segment and is an omni-channel player with around 80 physical stores across 40 cities. Beauty products have very high margin which makes it vulnerable to fake products. So, Nykaa follows inventory model to solve the authenticity issue in the BPC products. BPC contributes to around 90% of the Company revenue. Company has launched fashion segment around three years back.

Why invest in Nykaa?

The key investment arguments would be:

  • Market leader, with market share of almost 40%, in online BPC market (expected to grow fast)

  • Content led business model with focus on curation – 1,300 influencers, YouTube channel with 1.3 million hours of content and 1.1 million subscribers - this drives stickiness and is a big MOAT

  • Extensive (and sometimes exclusive) brand relationships

  • Excellent management team

  • Profitable start-up (especially at EBITDA level) generating positive cash flow

How do operating metrics look?

As I had mentioned in the Zomato article, we need to understand and focus on operating metrics when investing in a young start-up. Company generates 90% of revenue from BPC segment so I would focus on its operating metrics:

Key takeaways:

  • Unique transacting customers have grown from 3.5 million in FY19 to 7.2 million (on an annualized basis) in Q2 FY22 – 2x increase

  • Average order per customer has gone up from 3x in FY21 to 3.5x in FY22

  • Average order value had sharply increased in the COVID period – is slightly down in Q1/Q2 FY22 but still up vs FY19 and FY20

  • Contribution margin per order was around INR 200-220 in FY19 and FY20 which increased to almost INR 300; it is now back in range of INR 180-200 with higher fulfillment expense and marketing & advertising expense. We had seen increase in fulfilment expense in Zomato too – so the story is consistent here. On higher marketing & expense – possible reason could be linked to the recent IPO (higher expense to increase brand awareness). We would have to track this in subsequent quarters

2. Key Historical Financials

3. What is my view on company valuation?

The stock price of the Company has almost doubled since the IPO in November 2021. Market, being flushed with liquidity, has been looking for a good start-up growth story. And Nykaa is a profitable one – fits the bill perfectly.

Company trades at Price to Revenue (annualized Q2 FY22) ratio of 30x in comparison to:

  • International peer like Ulta trade at a multiple of Price to Revenue ratio of 2.5x

  • VCs have invested in the Company’s competitors like Purplle and Good Glamm Group at an equity valuation of around 8x revenue. We should keep in mind that VCs invest in a company with lot of downside protection – with clauses like liquidation preference (if the company is sold then the money is distributed based on waterfall where last investor get 1-2x of the investment first before any previous investor receives any money). So, we should apply discount to any VC investment valuation as public investor does not get the same downside protection

On an overall basis, business is good and cash flow positive (rarity for a start-up) but is significantly overvalued at the current levels. Do let me know your thoughts in the comments section below. Will you invest?

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • Competitive intensity is expected to go up. Horizontal players like Amazon and Flipkart are increasing their focus on the segment. VCs have pumped lot of capital in the competitors after seeing the IPO success. Other players like Reliance and Tata Digital are also looking to enter the space

  • Lack of profitable alternative in start-up space can keep retail investors interested in the short/medium term


About the Author

I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.


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